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Athenahealth Should Take Elliott's Buyout Offer Seriously

(Bloomberg) -- Elliott Management Corp.’s bid for Athenahealth Inc. is a good starting point for buyout talks.

The hedge fund on Monday released the details of a $6.9 billion takeover offer for the health-care IT company. The bid comes about a year after Elliott disclosed a stake in Athenahealth and sought talks with the board about a potential sale, among other things. That Elliott itself would make an actual offer represents a significant jump in ambition for the private equity side of its business. The bid could be a means of pressuring Jonathan Bush, Athenahealth’s controversial leader and co-founder, to come to the table for deal negotiations. Whether or not Elliott ends up being the eventual buyer, Bush would be wise to capitalize on the opportunity and exit the public market. Athenahealth for now has said it’s reviewing the proposal.

On the one hand, Elliott’s bid looks opportunistic, coming mere weeks after a post-earnings plunge of about 11 percent as soft bookings in the first quarter made investors skeptical of Athenahealth’s future growth prospects. On the other, Elliott appears to be an investor whose patience is running thin. The firm says it first approached Athenahealth about a buyout in November, but the company refused to engage. Excluding Monday’s pop, the shares have zigged and zagged, but basically gone nowhere in the time since.

Athenahealth had committed to a strategic review of its operational and financial strategy in August following Elliott’s criticisms. The company pledged to cut costs and hire an independent chairman. It decided on former General Electric Co. CEO Jeff Immelt, whose operational chops Elliott has questioned, with GE now dealing with the fallout of poor capital allocation decisions made during his tenure and the mismanagement of its power business.

Demand appears to be slowing for Athenahealth’s main software products for health-care providers, and it’s having a hard time breaking into new markets that are dominated by bigger incumbents like Cerner Corp. and Epic Systems. At the same time, investors are eager to see follow-through on Athenahealth’s cost-cutting initiatives and have been frustrated by management’s inability to hit margin goals. These are the types of issues that tend to be best sorted away from the unforgiving glare of public markets.

Elliott is offering $160 a share in cash, which it says works out to about $6.9 billion including net debt. That’s about 19 times Athenahealth’s estimated Ebitda this year, according to data compiled by Bloomberg, and is a discount to the median multiple paid for medical-information systems takeovers valued at more than $100 million over the past five years. That said, analysts on average were projecting a price of just $143 for Athenahealth’s shares, a target that likely included at least some takeover markup but also expectations for slowing revenue growth over the next few years.

Elliott’s bid may just be the opening gambit. The hedge fund has been expanding the private equity side of its business, completing a $1.6 billion buyout of network-technology company Gigamon Inc. late last year. But the firm has made offers in the past for companies where it’s initially been an investor, before ultimately backing a buyout by an alternative bidder. Elliott bid for Compuware Corp. in 2012 and for Riverbed Technology Inc. in 2014; both were eventually sold to private equity firm Thoma Bravo.

In its statement announcing the offer for Athenahealth, Elliott noted that “other parties have also expressed interest” in a deal, but the company hasn’t engaged with them either. At the very least, it wouldn’t be surprising to see Elliott eventually team up with a private equity firm given the size of the transaction. It said it has received financing indications and intends to fund the rest via equity invested by itself and “select partners.”

A strategic bidder also can’t be ruled out, although the purchase price may be a tough ask for most health-care IT companies. This would be the second-largest deal in the sector in the last 10 years. Investing in internal growth or smaller acquisitions is likely a more appealing option. An insurer may want Athenahealth’s rich trove of patient data. But UnitedHealth Group Inc.’s analytics-focused Optum unit is already big enough, and Cigna Corp. and Aetna Inc. are busy attempting blockbuster combinations with Express Scripts Holding Co. and CVS Health Corp., respectively. That leaves Anthem Inc. and Humana Inc., and buying Athenahealth would represent a significant shift in strategy for either company.

The biggest wild card in this scenario is Bush. The outspoken CEO doesn’t seem like the type to roll over on the first bid. Though Athenahealth has struggled, there’s real value in the data it has collected, and opportunity for growth from its population health unit and the medical-app business Epocrates. But given the recent trajectory of the business, rejecting Elliott’s offer outright may prompt shareholder unrest.

It’s time to negotiate.

To contact the authors of this story: Max Nisen at mnisen@bloomberg.net, Brooke Sutherland at bsutherland7@bloomberg.net.